HW Media connects and informs decision makers across the housing economy. Professionals rely on HW Media for breaking news, reporting, and industry data and rankings. Moving the Housing Market Forward.

Watchdog: FHA incorrectly insured $1.9 billion in mortgages in 2016

HUD-OIG report finds FHA insured nearly 10,000 ineligible borrowers

A new report from a federal watchdog finds that the Federal Housing Administration incorrectly insured approximately $1.9 billion worth of mortgages in 2016.

The new report, which was published recently by the Department of Housing and Urban Development Office of Inspector General, found that in 2016, the FHA insured an estimated 9,507 borrowers who were actually ineligible for FHA insurance because the borrowers had either delinquent federal debt or who were subject to federal administrative offset for delinquent child support.

“Of loans closed in 2016, FHA insured more than 9,500 loans worth $1.9 billion, which were not eligible for insurance because they were made to borrowers with delinquent Federal debt or who were subject to Federal administrative offset for delinquent child support,” HUD-OIG noted in its report.

“This condition occurred because the sources used by lenders to identify ineligible borrowers lacked sufficient current information and FHA did not adequately guide lenders on reviewing child support,” the report continued. “As a result, the FHA insurance fund faced a higher risk of loss, and the government in general did not realize the benefits of the Debt Collection Improvement Act.”

The issue is this: The FHA’s guidance prohibits lenders from continuing to process a mortgage application for an FHA-insured mortgage for borrowers with delinquent federal non-tax debt, held by agencies like the Department of Education, the Department of Justice, the Small Business Administration, or the Army and Air Force Exchange Service.

At that point, lenders need to verify the validity and delinquency status of the debt by contacting the creditor agency to which the debt is owed. If the creditor agency confirms that the debt is valid and in delinquent status as defined by the federal Debt Collection Improvement Act, the borrower is ineligible for an FHA-insured mortgage until the borrower resolves the debt with the creditor agency.

The Debt Collection Improvement Act of 1996, which prohibits a person from obtaining any federal assistance in the form of a loan, loan insurance, or guarantee if that person has a delinquent outstanding debt with any federal agency.

Additionally, federal regulation allows an offset of federal payments to satisfy delinquent non-tax debt owed to the government and to collect past-due child support obligations. Agencies also must deny federal financial assistance to individuals who are subject to administrative offset to collect delinquent child support.

According to the HUD-OIG report, the FHA insured more than 9,500 loans that were ineligible because they failed those qualifications. The total value of those loans was $1.9 billion.

Now, it should be noted that the number of ineligible mortgages was a small percentage of the total number of loans the FHA insured in 2016. According to the HUD-OIG report, the FHA insured more than 1 million loans totaling $212 billion during calendar year 2016.

But HUD-OIG didn’t examine all of those loans. Rather, the watchdog reviewed a small sample and extrapolated the results of that exam out over the entire population.

From the report:

We reviewed a statistical sample of 60 loans from a universe of 13,927 FHA-insured loans that closed in 2016 and also had data on their related borrowers in the Bureau of the Fiscal Service’s Do Not Pay databases. The Do Not Pay Business Center supports Federal agencies in their efforts to reduce the number of improper payments. Do Not Pay allows agencies to check various databases before making payments or awards to identify ineligible recipients and to prevent fraud or errors. We verified that 47 of the 60 sample loans were made to borrowers who were barred by Federal requirements. We used these results to project the total number and value of ineligible loans insured by FHA.

As for what to do about it, the watchdog has some suggestions.

“We recommend that FHA put $1.9 billion to better use by developing a method for using the Do Not Pay portal to identify delinquent child support and delinquent Federal debt to prevent future FHA loans to ineligible borrowers,” HUD-OIG noted. 

“We also recommend that FHA revise the single-family handbook to comply with the regulation that prevents loans to borrowers with delinquent child support subject to Federal offset and schedule the timely renewal of data-sharing agreements to prevent data loss in the Credit Alert Interactive Voice Response System or discontinue use of CAIVRS if the information duplicates the information available in the Do Not Pay portal,” HUD-OIG added.

In a letter of response that was included in the report, the FHA said that it agrees with the OIG’s recommendations and plans to work with the Department of the Treasury to put the recommendations into action.

For the full HUD-OIG report, click here.

Most Popular Articles

3d rendering of a row of luxury townhouses along a street

Log In

Forgot Password?

Don't have an account? Please